Groupon Wheezes Into Year 2

Although lingering doubts over the viability of the daily deal model have been clobbering Groupon on Wall Street, it has done some things right in its first year as a public company. Notably, it has expanded its operations beyond daily deals. "From the consultant point of view, it is doing everything we say it needs to do to squeeze out value from its relationships," said BIA/Kelsey's Peter Krasilovsky.

By Erika Morphy
Nov 5, 2012 10:48 AM PT

Just in time for its one-year anniversary of being a public company, Groupon's response to a U.S. Securities and Exchange Commission inquiry into its accounting practices was made public. It was an inauspicious reminder that to regulators and investors, Groupon -- once the tech industry's golden child -- remains a question mark. The stock market responded to the disclosure on Friday by sinking Groupon's share price some 5 percent to a new low of US$3.83.

The SEC had been pursuing a few lines of inquiry, including how the company estimates customer refunds that are part of its "Groupon Promise" guarantee, which offers subscribers a full refund if they change their mind about a purchase.

The agency began probing that particular issue in August, after Groupon's second quarter earnings report indicated it had made a large number of refunds. In the filing, Groupon said future or potential refunds was not a metric that it evaluated.

Groupon did not respond to our request to comment for this story.

Diminished Investor Expectations

Groupon's initial public offering on Nov. 4, 2011, had been eagerly anticipated -- but doubt began to cloud it after its first S-1 filing showed an Adjusted Consolidated Segment Operating Income metric that inflated the company's worth by ignoring marketing costs. Groupon amended its filing, but not before it was widely derided.

Since then, it seems the company could do no right, and the market has punished Groupon accordingly. The price of its IPO was $20 per share -- a year later, it is trading at $3.80.

Without a doubt, investor confidence in Groupon has plummeted, Peter Krasilovsky, an analyst with BIA/Kelsey, told the E-Commerce Times.

On paper, the company is making all the right moves to reposition itself, he said. "The question is, will investors have the patience to wait for some of these moves to have an impact?"

A Local Commerce Operator

Groupon's big strategic play is to morph into an operator for local commerce, providing all kinds of services for small businesses. For example, Groupon recently rolled out Groupon Payments, a small business offering it described as easier and cheaper, compared to traditional payment systems.

"From the consultant point of view, it is doing everything we say it needs to do to squeeze out value from its relationships," said Krasilovsky.

However, Groupon's push to become the local merchant's best friend is a race against time -- and it requires investors to take a leap of faith that it can evolve away from its early, pure play daily deal roots, he noted.

"Some of these measures could take three-to-five year to mature. In the meantime, Groupon is heavily dependent on the daily deals business," Krasilovsky pointed out.

The macro environment for daily deals is not pretty -- several players are losing money, and some have already closed their doors. Others continue to introduce new twists to the model, bringing even more competition.

Daily Deal Doubts

The value of the daily deal model -- at least, its value for merchants -- is undeniably in doubt, Krasilovsky said. Merchant complaints have become downright commonplace, despite Groupon's efforts to address some of them -- such as predicting how a deal offer will impact supply.

Those efforts may not be enough.

Some of the deal terms are very one-sided in Groupon's favor, such as the tactic of offering a payout as the coupon is being used rather than in a lump sum 30 days after the deal's run, observed Scott Lorenz, president of
Westwind Communications.

"It looks like Groupon will benefit from any shrinkage in coupon redemption rather than the client," he told the E-Commerce Times.

"These things are good for Groupon," said Lorenz, "but not the businesses who provide goods and services at a reduced rate of 50 percent or more who figured a shrinkage rate into the deal."